From Black Web 2.0
I thought I’d share a few things that I learned during my time at AlphaLab to hopefully encourage you to apply to participate in one these programs. The experience is incredible, and the knowledge you gain will be invaluable.
Lesson 1: Even a small amount of operating capital from an investment can be extremely useful.
Outsiders often look at the $15-$25,000 provided by startup programs as being no where near enough money to get a business off the ground. They’re wrong. You sure can’t live off $15,000, but if startup capital was purely for living, it would be called “welfare”. While you may use some of the investment to live a “Ramen noodle” lifestyle, its primary purpose is to support the development of your business. You have no idea how many things creep up that need to be paid for when starting a company. You’ll need to lease a server. You’ll need to buy computers or software manuals. You’ll need to pay contractors to do some dirty work. You’ll even need to pay an attorney to look at the document that GETS you the investment. If I had to pay $2,000 out of my pocket simply to incorporate, and get legal documents produced, I probably would have never started my business anytime soon. Or at least it would have stalled so I could first convince my wife I had a good idea, and then allow me to spend our money on that idea. Being able to chip away at a small five figure bank account to support the business operations is extremely helpful.
Lesson 2: Startup programs accelerate your understanding of the investment world.
Who the hell wouldn’t want to get a $1 million investment from Sequoia Capital for fair terms? But since you have no concept of what investment terms even are, a startup program really helps you understand how investments are arranged. Sure, the small investment you get from the incubator is not going to require 3,000 pages to read through, but even this simple transaction will show you that with a great team, and a great idea, you can get a check. Yeah. A check. You do some meetings. You forward emails to an attorney. You make calls. You sit in a room and they hand you probably the biggest single check you’ve ever received. Throughout that GLORIOUS process, you learn about important issues like dilution, option pools, pre and post money, convertible note, blah blah blah. You need to be able to speak this language else you won’t emit the confidence worthy of an investment. The experience of convincing the program to invest in your startup at least lays the foundation for when you may be negotiating for that $1 million round. But trust me – I hear that’s a lot of paperwork, and strings. But at least you know the game.
Lesson 3: Developers succeed in startup programs. Business people fail.
You need to be able to build what you’re proposing. If you’re the MBA, and you have a developer cofounder, understand this now and never forget it—you are no where near as valuable to an early stage startup as the developer next to you with just 10% equity in the company. To succeed in a startup program, you need to be able to build a product rapidly and with as few people as possible. Teams with two members who cannot do development have a much higher risk of not being successful because there’s too much time spent writing business plans, and less time writing code. Ev Williams flat out said he did nothing related to business planning when they decided to do Twitter. And do you think Steve Jobs would be holding up an iPhone today if the Woz wasn’t there building the future of home computers many years ago? So if you’re a startup founder and are known as the “business” person, recognize that hoarding 90% of your equity is just pathetic. You do not have the skills to get it done. Developers, developers, developers.
Lesson 4: Demo Day is not necessarily magical.
Most startup programs have what is known commonly as Demo Day. This day is where the media, investors and other influentials gather to see demos of the newly-formed startup businesses. You will almost always have some HEAVY players in the room. I’m talking some of the most successful venture capital firms in the world. It will be investment analysts mostly. These people do the vetting of startups and only bring the most interesting to the venture partners. In your head, you’re thinking this is your chance to land an investment—and it is. But the odds are ridiculously against you. You have no momentum. You have barely launched. Your story is just not interesting, yet. Only a small number of startups can attract VC interest simply from Demo Day. Still, many entrepreneurs look at Demo Day as do or die when they should be looking at it as the official coming out party and expect nothing more. Get up there and exude the attitude that you are moving forward with your idea with or without anyone in the room. Most likely after all the presentations have ended, and you’ve mingled with VCs, you will end the day with nothing but business cards. Luckily, my company was generating some revenues and my customers loved the product. So for me Demo Day was about telling everyone my plans for going forward. But you best believe I, like you will, was hoping I’d be one of those special companies. I wasn’t.
Lesson 5: Financial projections are both utterly ridiculous and insanely useful.
No one wants to openly admit that financial projections are just guesses when they talk with investors. I struggled with inventing a growth curve for The Resumator based on new customers per month because I had no data to justify, “150 new customers in January 2011″. But investors need to see projections, and the startup program wants you to make some guesses. They will not use that word unless under pressure, but that’s basically what you’re doing. Just plug in some numbers and see how ridiculous they “feel”. In other words, The Resumator is not a $100 billion company, so if my projections show that, I can feel safe knocking back a lot of numbers. All you need to do is get projections to a point where you and others can agree that the business could theoretically achieve that size. That’s what projections are for—putting a ceiling on the potential of your company that everyone agrees to.
But while projections are not based on any real facts, they are insanely useful when you apply the math with real data, and then compare that to your projections. In other words, it was so revealing for me to to see how much money my company would earn in a year if I did not get another customer. And if I wanted my company to be worth $10 million, I could see how many new customers I would need to get to that number. Suddenly I could say things like, “I need to quadruple my customers per month to hit $2 million”—which then put $10 million in perspective—not at all worth thinking about until I quadrupled new customers. Even more, I could just focus on doubling sign ups to even get to a $1 million business, and then even be more granular. If I can get 5 more customers per month, that’s a $130,000 revenue stream. Startup programs encourage you to plug in some numbers to get you thinking about these things so you can learn how to manage the initial growth of your business.
Lesson 6: Everyone roots for startups.
I cannot tell you how amazing it is that some very important people will do almost anything for a startup in these programs. VCs and other influentials will contact prospective customers, make introductions, share tips, and do so many other things with no expectation of anything in return—expect for you to succeed. The startup program organizers will work hard to get you press, help you find employees and advisers, and even raise more capital. You never feel alone or abandoned unless you’re not asking for help. This is perhaps one of the biggest reasons to get into an incubator. You’re going to have one hell of a stable of talent to help you get off the ground.
Lesson 7: You’ll know when to start your startup when not starting it is no longer an option.
This one sounds cryptic, but it was one of the best pieces of advice I have ever been given. While this revelation must occur prior to starting a company, it is so important to have it. You need to feel like you have no choice but to do your startup. Not because you’re desperate, but for other wonderful reasons. Perhaps you just can’t sit on the idea any longer. Or maybe you need to feed that desire to be your own boss. Or in my case—I got my first customers and felt an absolute obligation to be there for them 24/7. I learned this lesson from someone at Innovation Works, and I must have told about 80 other people it in the past 8 months.
There you go—seven lessons—now get out of here.